HISTORY OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985

[Mr. M. GOVINDARAJAN]

The Government found the ill effects of sickness in industrial companies such as loss production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds of financial institutions as a serious concern to the Government and the society at large.  There was also an increase in the incidences of sickness in industrial companies.  In order to fully utilize the productive industrial assets, afford maximum protection of employment and optimize the use of the funds of banks and financial institutions, the Government felt that it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible.

The Government was also of the view that it would also be equal imperative to salvage the productive assets and realize the amounts due to the banks and financial institutions, to the extent possible from non viable sick industrial companies through liquidation of those companies.   In view of all these facts, the Government felt the need to enact in public interest, a legislation to provide for timely determination, by a body of experts, the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable dispatch.   Keeping these objects in mind Sick Industrial Companies (Special Provisions) Act, 1985 was enacted.  The said Act was enacted with the avowed object of identifying sick and potentially sick companies and then tries to revive and rehabilitate them.

The Act created a two tired mechanism in the form of a Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).  The Board was vested with the power to conduct an inquiry into the sickness of an industrial company to prepare and sanction schemes for the reconstruction and for proper management of the company or for the winding up, if the sickness was found to be irreversible.  Since the object of this Act was to turn sick industrial companies into healthy ones, perhaps by waving a magic wand this Act also granted immunity in terms of Section 22, against any kind of proceedings for the recovery of dues, during the pendency of an inquiry of the preparation or operation of a scheme.

Since the Government felt that BIFR and AAIFR have not been able to fulfill the purpose and mandate as envisaged under SICA, 1985 of providing viable schemes for the revival of sick companies in a reasonable short time frame, in the year 1999, the Government constituted a Committee under the Chairmanship of Justice V. Balakrishna Eradi, a retired Judge of Supreme Court, to review the law relating to Insolvency and Winding up of companies.  The Committee presented a report on 31.07.2000, under the caption, ‘Report of the High Level Committee on Law Relating to Insolvency and Winding up of Companies’.    The Committee, after hearing all the parties and analyzing the statistical data made available to it, opined that the facts and figures spoke for themselves and they placed a big question mark on the utility of the institution of BIFR and SICA.  The problem of endemic delays inherent in SICA procedures of revival and reconstruction was a to a great extent exacerbated by the large scale abuse of the provisions relating to suspension of legal proceedings, suits and enforcement of contracts and other remedies contained in Section 22 of the Act.  The Committee pointed out that the effectiveness of SICA had been severely undermined by reason of enormous delays involved in the disposal of cases by BIFR.  The Committee also observed that the success rate of revival of sick companies had fallen far too short of the expectations.

The Committee, therefore, recommended that the Act should be repealed and the provisions contained therein for revival and rehabilitation should be telescoped into the structure of the Companies Act, 1956 itself.

The second, the Advisory Group on Bankruptcy Laws, headed by N.L.Mitra, went one step further in 2001, recommending the disbanding of the BIFR / AAIFR and the consolidation of insolvency laws into a separate comprehensive bankruptcy code to govern corporate insolvencies.

In response, the Government appeared to have accepted the former suggestion of the Advisory Group (though not the latter) – with the Companies (Second Amendment) Act, 2002 providing for the creation of a consolidated tribunal – the National Company Law Tribunal (NCLT), and its appellate authority, the National Company Law Appellate Tribunal (NCLAT) – to take over the functioning of the BIFR and AAIFR and the High Courts as regards insolvency; and the SICA (Special Provisions) Repeal Act, 2003 formally abolishing the BIFR and AAIFR.  The provisions relating to sick industries were incorporated by the Companies (Second Amendment) Act, 2002 vide Part VI under the topic ‘Revival and Rehabilitation of Sick Industrial Companies’ from Section 424A to 424L.   But the sections have not been notified till the lapse of Companies Act, 1956.  However, these changes did not come into effect for two reasons:

• the constitutionality of the provisions in the Companies (Second Amendment) Act, 2002 creating the NCLT / NCLAT were challenged on the ground of excessive judicial delegation – a petition not disposed by the Supreme Court until 2010 (when the constitutionality was upheld in principle but changes were recommended in certain specifics such as appointment criteria to such bodies); and
• various other provisions in the Companies (Second Amendment) Act, 2002 and the SICA (Special Provisions) Repeal Act, 2003, werenot notified, and therefore not brought into effect by the Government through publication in the Official Gazette.

As a result, the Companies Act, 1956 continues to prevail as does the SICA, 1985. Consequently, in terms of administrative machinery for the insolvency framework, the BIFR/AAIFT also continues to function.

Now the Companies Act, 2013 was enacted which came into effect from 12.09.2013.  This Act provides for the establishment of National Company Law Tribunal and National Company Law Appellate Tribunal.  The same has been challenged before the Supreme Court.  The Supreme Court allowed the establishment of both the Tribunal with directions to modify the method of selection of Members of the Board.   The National Company Law Tribunal and National Company Law Appellate Tribunal have been established and now they are in the function of dealing company law matters.

Chapter XIX of the Companies Act, 2013 deals with the revival and rehabilitation of sick companies.   The following are the sections dealing with the said subject-

• Section 253 – Determination of sickness;
• Section 254 – Application for revival and rehabilitation;
• Section 255 – Exclusion of certain time in computing period of limitation;
• Section 256 – Appointment of interim administrator;
• Section 257 – Committee of creditors;
• Section 258 – Order of Tribunal;
• Section 259 – Appointment of administrator;
• Section 260 – Powers and duties of company administrator;
• Section 261 – Scheme of revival and rehabilitation;
• Section 262 –Sanction of scheme;
• Section 263- Scheme to be binding;
• Section 264- Implementation of scheme;
• Section 265 – Winding up of company on report of company administrator;
• Section 266 – Power of Tribunal to assess damages against delinquent directors, etc.,
• Section 267 – Punishment for certain offences;
• Section 268 – Bar of jurisdiction;
• Section 269 – Rehabilitation and Insolvency Fund.

These sections have also not yet been notified.  As such the Act is prevailing and the authorities constituted under the Act are also prevailing.